New norms to check hawala

MUMBAI: The Income-Tax department is finally beginning to sink its teeth into the full extent of the hawala racket. In the last four months, massive raids conducted by the IT officials across key commercial hubs across Maharashtra and Gujarat, have unearthed bank transactions worth Rs 1,000 crore, which have been linked to the flourishing hawala trade.

IT officials say that these large seizures have raised the possibility that FM P Chidambaram could announce new measures in his Budget to check the runaway growth in the parallel economy.

Sources say this could include an amendment in the I-T Act, which puts the onus of proving legitimacy of transactions on the individual or firm in those cases where fake transactions have been detected.

Now, hawala isn���t an entirely new phenomenon. For many years now, unscrupulous businessmen and industrialists have used dubious means to overstate expenses, and thereby avoid paying taxes.

Even some of the country���s largest private sector firms have been known to be involved in these dubious transactions in order to show lower incomes. Every day, hawala trades are known to run into a few thousand crores, robbing government of taxes.

For decades, I-T officials turned a blind eye to these illegitimate transactions. But now, they are finally beginning to sniff out them out. They too are stunned by just how deep these tentacles are. CP Tank and Kalbadevi in Mumbai are said to be the hotbed of hawala, where, as an IT officer puts it, ������you can purchase even an aircraft without any funds������. In December, officials visited nine premises in Lower Parel and Byculla in connection with suspected hawala transactions in the iron trade.

One of the raids on a medium-sized firm led them to a dealer who had fictitious bills for stocks worth Rs 50 crore. When the department began investigating the man, they discovered that the supplier wasn���t even part of the iron trade. He was, in fact, a hawala dealer, whose main task was to raise bills. He gave them leads to the real supplier, who had sealed the deal in cash, and not paid taxes on it.

The amount in question: Rs 500 crore.

Now, the directorate of revenue intelligence (DRI) is also looking at the same dealer for suspected export benefit violations.

Another raid on a diamond trader in Mumbai revealed that the firm had bought rough diamonds from a supplier. But once again, it turned out that the entity mentioned in the bills wasn���t the real supplier. When the taxmen asked one of the traders for an explanation, he turned around and brazenly asked, ������This is market practice. How can you ask questions when everybody is doing it?������

More unsettling is the case, sources say, of hawala in the stock market. One case alone in Kolkata revealed the use of Rs 300 cr in fake share market transactions. Illegal money is pumped into dud stocks through dummy investors. By circular trading through dummy investors ��� a driver, or watchman or plain fake investors, the price is jacked up. Then the actual beneficiary of the hawala, typically the last person in the chain, sells the stock in the market at a high price.

In the end, he does pay capital gains tax, which is now only 10% for the short term. This way, he is able to launder his illicit funds.

These raids have reinforced the view that crucial changes in legislation in the I-T Act seem imperative. By putting the onus on the individual (whose fake transaction has been detected) to prove the legitimacy of his transactions, sources said it would help speed up investigations and allow the department to go after hawala transactions in a big way.

The ball is now in the FM���s court to initiate a big clean-up act.